In the good books

The A2 Milk Company (A2M) Upgraded to Buy from Neutral by Citi B/H/S: 3/1/0

Citi has upgraded its rating to Buy from Neutral while increasing its price target by no less than 41% to $5.15. Consider this a mea culpa from a team of analysts who had been the bears in the market when it comes to selling milk and milk products into the Chinese market.

Underlying the above changes, the analysts lifted FY18 EPS estimate by 34%. The justification given is the out of stocks situation that a2 Platinum has experienced since March. This, say the analysts, indicates demand remains stronger than expected.

CYBG (CYB) Upgraded to Outperform from Neutral by Credit Suisse B/H/S: 1/2/2

Following the June quarter trading update Credit Suisse upgrades earnings estimates by 1-4%. The broker observes strong execution on the cost restructuring story while revenues remain intact. Bad debts are low and stable.

Rating is upgraded to Outperform from Neutral. Target is $5.25.

Goodman Group (GMG) Upgraded to Hold from Lighten by Ord Minnett B/H/S: 3/4/0

Following an update to the model, Ord Minnett raises its recommendation to Hold from Lighten and lifts the target to $7.90 from $7.80.

OceanaGold (OGC) Upgraded to Buy from Hold by Deutsche Bank B/H/S: 4/2/0

Deutsche Bank believes the sell-off in the stock is overdone. Commissioning problems at Haile have been identified and are being resolved. Meanwhile, gold output fell in the quarter as Didipio milled grade declined, as per guidance.

The broker believes the stock screens cheap and upgrades to Buy from Hold. Target is reduced to $4.40 from $4.50.

ResMed (RMD) Upgraded to Buy from Neutral by Citi B/H/S: 4/2/0

Q4 numbers proved better than expected and Citi analysts are of the view that management’s guidance for FY18 looks “cautious”, seen as a reflection of company’s expectation the positive potential of the new masks will arrive incrementally and gradually through the financial period.

New masks have faced headwinds from supply bottlenecks, highlights Citi. Solid growth in devices in France should now be expected too. Small changes to estimates have been made. Target price moves to $10.50, up 50 cents, on rolling forward of valuation modelling.

See downgrade below.

In the not-so-good books

AWE (AWE) Downgraded to Neutral from Buy by UBS B/H/S: 1/4/1

UBS was disappointed with June quarter production primarily because of lower output at Casino. Field production will be constrained until a work-over can be conducted.

The broker downgrades to Neutral from Buy because of the reduction in the valuation of Casino and recent share price appreciation.

Almost 50% of the broker’s asset value is now attributed to Waitsia, highlighting the growing importance of this field for the company. Target is reduced to $0.56 from $0.60.

Freelancer (FLN) Downgraded to Neutral from Buy by UBS B/H/S: 0/1/0

First half results were materially below UBS expectations. Job conversion issues affected the marketplace division and the take rate also fell.

The broker is positive on the longer-term potential of the business but recognises, at this stage, a lack of revenue growth will be a key consideration for investors.

Rating is downgraded to Neutral from Buy. Target is reduced to $0.70 from $1.50.

Japara Healthcare (JHC) Downgraded to Neutral from Buy by UBS B/H/S: 1/2/1

UBS believes the future is bright for Japara Healthcare. The company carries the most options on its balance sheet of the three listed players and a significant opportunity for margin upside.

While positive on long-run growth the broker envisages significant risk that FY17 guidance is missed, given the quantum of the turnaround required from the first half.

Rating is downgraded to Neutral from Buy.  Target is reduced to $2.15 from $2.40.

Mantra Group (MTR) Downgraded to Neutral from Buy by Citi and to Equal-weight from Overweight by Morgan Stanley B/H/S: 3/5/0

Citi downgrades to Neutral from Buy on the belief that consensus market forecasts are too optimistic, albeit not dramatically so. One factor mentioned is the anticipated Commonwealth Games uplift which Citi suggests is likely to be more moderate than the market expects.

A strong Aussie dollar represents yet another downside risk, point out the analysts. Estimates have been cut. Price target drops to $3.15 from $3.27 in response.

Morgan Stanley observes strength in Australian outbound growth and moderation in inbound growth as a higher Australian dollar makes the country more expensive for foreigners and translation of offshore assets.

The broker finds it hard to draw many positives for the company from the current conditions and downgrades to Equal-weight from Overweight. Target is reduced to $3.20 from $4.20.  Industry view is In-Line.

Lend Lease (LLC) Downgraded to Hold from Accumulate by Ord Minnett B/H/S: 4/2/0

Ord Minnett has revised earnings estimates and dividend forecasts, noting Lend Lease is reasonably well-positioned to deliver growth in earnings per share over coming years. Nevertheless, the share price has rallied over recent months, pushing up multiples and thus the broker downgrades to Hold from Accumulate.

Target is reduced to $17.00 from $17.20. Ord Minnett raises FY17 estimates by 1% and cuts FY18 by -2%. The broker’s view on the company is underpinned by a substantial list of development projects and a solid construction backlog.

Magnis Resources (MNS) Downgraded to Underperform from Outperform by Macquarie B/H/S: 0/0/1

Changes to Tanzanian law have had negative impact on the share prices of many companies with exposure to the country.

Magnis Resources has continuing uncertainty relating to its special mining licence and mineral development agreements, with the potential for the government to increase its free-carried share to 16%.

A lack of progress at Nachu and confusing messages leaves Macquarie to question the direction of the company. Downgrade to Underperform from Outperform. Target is reduced to $0.30 from $1.05.

Navitas (NVT) Downgraded to Neutral from Outperform by Macquarie B/H/S: 0/5/1

FY17 EBITDA was in line with guidance but below Macquarie’s forecasts. The broker transfers coverage of the stock to another analyst and downgrades the rating to Neutral from Outperform. Target is lowered to $4.51 from $5.00.

Although industry conditions remain favourable the broker observes a number of company-specific headwinds will affect FY18. Reduced AMEP contracts and a cessation of income from closed colleges leads to a downgrade to FY18 forecasts for earnings per share by -14.2%.

ResMed (RMD) Downgraded to Neutral from Outperform by Credit Suisse B/H/S: 4/2/0

Flow generators drove revenue growth in the June quarter but masks were below Credit Suisse forecasts. The broker notes the lack of expansion in gross margin came from an adverse shift in mix, with robust sales of lower-margin flow generators relative to higher-margin masks.

Credit Suisse forecasts stronger mask growth versus flow generators in FY18 but suspects the impact on gross margin may be limited.

Target is reduced to $9.40 from $9.70. Rating is downgraded to Neutral from Outperform.

See upgrade above.

Sandfire Resources (SFR) Downgraded to Neutral from Outperform by Macquarie, to Hold from Add by Morgans and to Hold from Speculative Buy by Ord Minnett B/H/S: 1/5/2

June quarter production was in line with Macquarie’s expectations but guidance for FY18 is well below. The broker materially lowers earnings forecasts as a result.

Exploration around Doolgunna continues to disappoint the broker and the pressure on the company to make a meaningful discovery is building.

Hence, in the absence of an acquisition or exploration success, Macquarie downgrades to Neutral from Outperform. Target is reduced to $6.40 from $7.70.

FY17 production was in line and Morgans notes a consistent track record in operations. Cash accumulation also impressed the broker but investor intention is expected to focus increasingly on near-mine exploration success.

The broker downgrades to Hold from Add and reduces the target to $6.44 from $6.79.

June quarter results were relatively solid, Ord Minnett observes. The recent performance of the share price leads the broker to downgrade to Hold from Speculative Buy.

Ord Minnett will become more positive if and when there are signs of further growth plans, such as the Black Butte project, or other exploration adding mine life.  Target is reduced to $6.30 from $6.70.

Saracen (SAR) Downgraded to Neutral from Buy by Citi B/H/S: 1/1/0

Citi has downgraded to Neutral from Buy, while lifting its price target to $1.48 from $1.46. The move follows a positive news announcement by the company, as reserve lives have been extended significantly.

The explanation for the move is simply “valuation”. Citi’s bull case scenario lifts valuation to $1.89/sh while the bear case pulls it down to $1.12/sh. A fall in Deep South grades is responsible for reduced FY18/19 earnings estimates.

Select Harvests (SHV) Downgraded to Reduce from Hold by Morgans B/H/S: 0/1/1

The company has issued materially lower guidance for FY17 net profit because of a lower Australian dollar almond price and cost pressures. Morgans consequently downgrades FY17 net profit forecasts by -40.3% and makes material revisions to FY18 and FY19 as well.

The broker observes the quantum and timing of the downgrade is disappointing and reflects one of the most difficult seasons on record for the company.

Moreover, the belated recognition of material cost pressures is a concern. Rating is downgraded to Reduce from Hold and the target to $4.05 from $4.75.

Syrah Resources (SYR) Downgraded to Neutral from Outperform by Macquarie B/H/S: 3/2/0

Commissioning has begun at Balama and initial sales contracts have been formalised but delays to construction of some key components have pushed first production to October.

Macquarie now takes a more conservative view on the ramp up. The broker expects the next 12 months will present plenty of technical challenges. Rating is downgraded to Neutral from Outperform. Target is reduced to $3.20 from $3.60.

Trade Me Group (TME) Downgraded to Underperform from Neutral by Macquarie B/H/S: 1/2/2

Macquarie has reviewed forecasting assumptions and downgrades the stock to Underperform from Neutral as a result. Target is lowered to NZ$5.00 from NZ$5.30.

This downgrade reflects the strong margins currently being enjoyed, and the market’s expectations for margin growth at a time when competitor activity has stepped up.

Macquarie does not expect margin growth and would not be surprised if the company signals further investment in development.

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